Market report.

Stocks Stage A Sharp Turnaround

Ge, Citigroup Lead Rally

Bond Market Slips

Oil Prices Rise

December 16, 1998|By Bill Barnhart.

An unexpectedly bullish outlook by General Electric and optimism among traders ahead of Friday's "triple-witching" expirations of stock-related options and futures contracts prompted a U-turn in stock prices Tuesday.

News that Citigroup, the financial services giant created this year through the merger of Citicorp and Travelers Group, would cut 10,400 jobs rallied financial service stocks.

The Dow Jones industrials, which fell 126 points on Monday rebounded 127.70 points, or 1.5 percent, to 8823.30. New York Stock Exchange volume totaled 773 million, compared to 695 million in Monday's sell-off.

General Electric led the Dow higher, gaining $6.31, to $93.12, after Chairman Jack Welch gave an upbeat assessment of the company's NBC television unit at a speech Monday night. Analysts said GE may boost its dividend Friday.

Citigroup added $2.69, to $48.75, after announcing a major restructuring that would require a special charge to earnings of $900 million.

A reversal of fortune for computer-technology stocks pushed the Nasdaq composite index up 45.68, or 2.3 percent, to 2012.60, after a 62-point loss on Monday. The Russell 2000 index of small company stocks also rebounded from a Monday slump, ending up 1.63 to 389.57.

Technical market analyst Richard Scarlata, who turned bearish on Nov. 23, the day before the Dow peaked in its latest rally, correctly predicted early Tuesday stocks were in for a bounce.

For one thing, the week of the December triple-witching expirations has a strong history of rising stock prices. In addition, he observed that Monday's drop, which pushed the Dow industrials below their 200-day moving average, was not followed by other technical breakdowns that would confirm a market slide.

Finally, several market indicators that usually act contrary to their apparent signal were flashing "buy" signals. For example, the amount of put option-buying relative to call option-buying has been rising, suggesting increasing negative sentiment among typically incorrect stock option investors--a signal that stock prices are headed higher.

Scarlata said the likelihood that President Clinton will be impeached has been fully discounted in stock prices and "is not a factor." Several analysts said Tuesday the market overreacted Monday to the momentum behind impeachment. On the other hand, the chance that he might avoid impeachment implies a strong market rally that has yet to be recognized in stock prices, Scarlata said.

"What if he squeaks through? This market would be up 150 points," he said.

Peoria-based Caterpillar joined the list of high-profile companies warning of disappointing fourth-quarter results. Caterpillar lost $1.81, to $44.44. The company cited widespread price-cutting in the heavy equipment industry among other factors.

Charles Hill, director of research at First Call in Boston, said six of the 17 analysts who follow Caterpillar quickly cut their forecast of fourth-quarter earnings per share to 84 cents from the previous consensus of $1.06. For 1999, the six dropped their estimates to $4.13 a share from the First Call consensus of $4.33.

Among other stocks in the news, Eastman Chemical sank $10.75 to a 52-week closing low of $46.12, after it said its fourth-quarter results would fall well short of Wall Street estimates and warned of problems in the first quarter of 1999.

Treasury bonds slipped despite Tuesday's report on consumer prices, which affirmed that inflation remains well under control. The dollar advanced against major currencies, reversing a recent downtrend.

Chief economist Bruce Steinberg sees a 5 percent erosion of corporate profits amid slow economic growth--2 percent growth in GDP vs. an estimated 3.7 percent in 1998. Lower interest rates engineered by the Federal Reserve should lift stock prices, but at a rate far below the last four years.

Richard Bernstein, chief quantitative strategist, said the fundamental outlook for corporate profitability and stock prices is worse now than when he shifted his preference towards bonds away from stocks in June.

Merrill analysts were bullish on high-grade corporate bonds and municipal bonds, which have seen their yields widen in relation to Treasury bond yields.

Merrill analysts expected the dollar to rebound next year, as Japan remains mired in recession and Europe struggles to cope with global competitiveness and adjust to the new multinational currency, the euro.